Follow us on Twitter

Public Citizen Report Exposes Builders’ Use of Forced Arbitration and Deceptive Warranties to Escape Accountability for Construction Flaws

WASHINGTON, D.C. – Millions of new home purchasers each year are forced into binding mandatory arbitration by deceptive “warranties,” and those warranties may violate the law in as many as 17 states, Public Citizen has found.

These warranties are particularly insidious because consumers often do not learn of their details until after moving into their new houses. Although builders often portray the warranties as gifts, bonuses or extra protections, the warranties actually serve to exempt the builder from liability for all sorts of problems (such as mold, building code violations and “consequential damages”) while relegating buyers to pursue legal disputes in a private forum chosen by the warranty company.

Public Citizen today sent letters to attorneys general in states that ban the use of forced arbitration in insurance contracts. Those states are Arkansas, Georgia, Hawaii, Iowa, Kansas, Kentucky, Louisiana, Maryland, Missouri, Montana, Nebraska, New Mexico, Oklahoma, South Carolina, South Dakota, Utah and Washington. The letters are posted at www.FairArbitrationNow.org.

Public Citizen’s report exposes the troubling consequences of forced arbitration for home buyers, a process that is rife with bias and exorbitant costs – and is so devoid of safeguards that an arbitrator’s failure to follow the law is specifically disallowed as a ground for appeal. Among the outrages revealed in the report, available at www.FairArbitrationNow.org:

In Georgia, an arbitrator seemed to accept Leslie and Scott Kimbell’s assertion that their floor was sinking but inexplicably blamed them for the problem rather than the builder who had failed to install proper supports under their stone fireplace. The arbitrator provided no relief and instead hit the couple with $12,950 in fees.

Jordan Fogal and her husband were forced from their Houston townhouse because of mold caused by a leaky roof. An arbitrator ruled that the builder had engaged in fraud. But she awarded the Fogals just $26,088 – less than 8 percent of what they paid for a house they were forced to abandon.

Army helicopter pilot John Rechtien and his wife, Michelle, of Savannah, Ga., filed for arbitration after battling their builder for nearly two years over myriad problems. The arbitrator cited technical language in the warranty to dismiss complaints over leaks, mold, broken trim and unfinished drywall, among other problems. On the items for which the arbitrator held the builder liable, he based his award primarily on repair estimates that the builder obtained and submitted to the arbitrator. When Michelle called the same contractors to make the repairs, they refused to honor the prices that formed the basis of the award.

Houston couple William and Jennifer Falbaum convinced an arbitrator that the foundation of their house was flawed. The arbitrator agreed but ruled against the couple in large part because he personally disagreed with an opinion of a Texas Court of Appeals. After the arbitration, the couple learned that the arbitrator had even signed a brief submitted to the Texas Supreme Court on behalf of the Greater Houston Builders Association seeking to overturn that very court decision.

“Because of forced arbitration, my husband and I have been stuck with a house riddled with costly defects,” Michelle Rechtien said during a press conference to discuss the report’s findings. “The building company we bought our new home from has used arbitration to force complaints against it into a rigged system so it can avoid accountability.”

Added Fogal, who also spoke at the press conference, “Our story is shared by millions of Americans caught in the snare of this cursed [arbitration] clause. Arbitration is the privatization of the justice system where the rules no longer apply.”

Although proponents of forced arbitration often call for more “study” of the problem rather than a cure, scant information is available to the public for real research – a problem for which the arbitration industry also is to blame. The process is inherently secretive, and arbitration firms routinely flout the few laws that require them to disclose basic information about their cases. The American Arbitration Association, the country’s largest arbitration firm, is supposed to abide by a California statute’s requirement to disclose a prevailing party in arbitrations, but does so in only 4.3 percent of its reports. Public Citizen has sent letters to California Attorney General Edmund G. Brown Jr. and the city attorneys of five California cities urging better enforcement of the state’s arbitration disclosure law.

“The arbitration companies know that their futures depend on keeping the people who hire them happy, and that means the builders and warranty companies,” said David Arkush, the director of Public Citizen’s Congress Watch division. “As a result, the system is stacked against the consumer.”

Public Citizen, Inc. and Public Citizen Foundation

Together, two separate corporate entities called Public Citizen, Inc. and Public Citizen Foundation, Inc., form Public Citizen. Both entities are part of the same overall organization, and this Web site refers to the two organizations collectively as Public Citizen.

Although the work of the two components overlaps, some activities are done by one component and not the other. The primary distinction is with respect to lobbying activity. Public Citizen, Inc., an IRS § 501(c)(4) entity, lobbies Congress to advance Public Citizen’s mission of protecting public health and safety, advancing government transparency, and urging corporate accountability. Public Citizen Foundation, however, is an IRS § 501(c)(3) organization. Accordingly, its ability to engage in lobbying is limited by federal law, but it may receive donations that are tax-deductible by the contributor. Public Citizen Inc. does most of the lobbying activity discussed on the Public Citizen Web site. Public Citizen Foundation performs most of the litigation and education activities discussed on the Web site.

You may make a contribution to Public Citizen, Inc., Public Citizen Foundation, or both. Contributions to both organizations are used to support our public interest work. However, each Public Citizen component will use only the funds contributed directly to it to carry out the activities it conducts as part of Public Citizen’s mission. Only gifts to the Foundation are tax-deductible. Individuals who want to join Public Citizen should make a contribution to Public Citizen, Inc., which will not be tax deductible.

To become a member of Public Citizen, click here. To become a member and make an additional tax-deductible donation to Public Citizen Foundation, click here.